One of the great things about using a credit card is that you can buy now and pay later. But some consumers take the pay-later concept to an extreme — they pay only the minimum amount due on their card's outstanding balance each month and end up paying the maximum costs. (The minimum payment is set by each card issuer — typically it's about two percent of your outstanding balance — and it is shown on your monthly bill.) While it might appear to be a good deal to pay only $20 a month to buy a $1,000 computer, FDIC Consumer News wants you to know just how much that computer will really cost when you add in the interest charges.

"Many people think if they only make the minimum payment shown on the statement they can keep their account current, keep charging, and have extra cash for other bills," says Janet Kincaid, a Senior Consumer Affairs Officer with the FDIC. "This is generally true, but what people also need to think about is the long-term cost of this alternative." She adds that if you pay only the minimum amount, "it will take you a very long time to pay off the balance, and the interest costs can be shocking."

Making Only the Minimum Payment Adds to Costs Starting Balance Interest Rate (APR) Monthly Payment Years to Pay Off Total Interest Paid Total Cost $5,000 18% The minimum ($100 the first month, then gradually declines) 46 $13,926 $18,926 $5,000 18% $100 8    $4,311    $9,311 $5,000 18% $250 2      $986    $5,986 Note: The minimum payment is assumed to be two percent of the outstanding balance or $10, whichever is greater. Years are rounded to the nearest whole year. Item Price Interest Rate (APR) Years to Pay Off Total Interest Paid Total Cost TV   $500 18%  8    $439    $939 Computer $1,000 18% 19 $1,899 $2,899 Furniture $2,500 18% 34 $6,281 $8,781 Note: All payments are the monthly minimum of two percent of the outstanding balance or $10, whichever is greater. Years are rounded to the nearest whole year.

How shocking? Take a look at the two tables to the right. The top one shows what would happen if you have a $5,000 outstanding balance on your credit card (to keep things simple, we assume you make no additional purchases), an Annual Percentage Rate of 18 percent, and you make only the minimum payment due ($100 initially but gradually declining each month because minimum payments usually are based on a percentage of the balance, which will decrease.) Using this example, it will take 46 years and cost $13,926 in interest charges before you've paid the $5,000, putting the total cost at $18,926. If instead you pay $100 the first month and every month — which would be more than the minimum due — the balance would be paid off in eight years and the interest charges would be cut from $13,926 to $4,311.

The bottom table shows that if you pay only the minimum due (set at two percent of the outstanding balance or $10, whichever is greater), a $500 television will cost $939 and require eight years of payments, a $1,000 computer will cost $2,899 and take 19 years of payments (about 15 years longer than you'll probably own the computer), and furniture purchased for $2,500 will cost $8,781 and take 34 years to pay off.

How can you protect yourself?

Pay as much as you can on your charge card each month — pay the entire balance, if possible — in order to avoid interest charges. The FDIC and other bank regulators have taken steps to ensure that minimum card payments are reasonable, "but because there is no law or regulation requiring that minimum payments be a certain dollar amount or percentage, card issuers have a lot of flexibility in setting low minimum payments," says FDIC Consumer Affairs Specialist Howard Herman. "As credit card interest rates are often quite high, consumers need to take charge of the situation and pay as much of their card balance as they can afford. The amount you pay toward your credit card bill each month can have greater long-term consequences for your finances than how much money you save or invest each month."

And if you can't pay most or all of your credit card bill, try to pay as much above the minimum as possible. "Depending on your balance," Kincaid says, "even stretching to pay an extra $50 a month can make a big difference in reducing your total interest costs."

If all you can afford is the minimum amount, pay that... and pay it on time. "Many consumers are not aware that if they pay less than the minimum, the bank may still assess a late fee of $35 or more and could report the account to the credit bureaus as delinquent," says FDIC Supervisory Consumer Affairs Specialist Lynne Gottesburen. This kind of negative information in your credit file could result in your card issuer increasing the interest rate or even canceling your card.

If you plan to carry a balance each month, look for a card that has a low interest rate and a grace period. The grace period is the number of days before the card company starts charging interest on new purchases. Remember that grace periods can vary. With most cards, if you don't pay your bill in full you can be charged interest immediately on new purchases. Many cards have no grace period, which means you always pay interest on new purchases from the day you make the purchase.